E-Tail TherapyIf you're getting sick of the same old business ideas, then it's time to go online. The robust e-commerce market is hotter than ever, and it just may be the cure for what ails you.
Entrepreneur magazine - January 2005
By Heather Clancy
According to any given expert, e-commerce sites have grabbed the same share of retail sales it took catalog companies nearly a century to achieve. While business and technology market-research analysts like Jupitermedia admit online sales account for a relatively modest piece of the retail market at roughly 2 percent, the medium has become invaluable for researching purchases. By 2008, Jupitermedia predicts 30 percent of all retail sales will be influenced by the time consumers spend online.
Another proof point: For the fourth quarter of 2004—retail's biggest season—eMarketer, a source for research, data and analysis on e-business, anticipated a 27.4 percent year-over-year jump in online sales to more than $22.3 billion, excluding travel or auction transactions. If you're wondering just how much more potential exists, online auction powerhouse eBay facilitated $8.3 billion in goods traded in the third quarter of 2004, according to a recent financial report.
Jeffrey Grau, senior analyst for eMarketer, cites the "democratization of the retail world" as a primary impetus. For one thing, he says, the online buyer is morphing away from the original stereotype: an upper-middle-class male in his late 20s or early 30s. "It's going much more mainstream," Grau notes. "You're finding that more ethnic minorities are going online. [People in] more rural areas are going online."
From the entrepreneur's perspective, e-commerce dramatically increases the number of customers you can reach. Exclusive research performed by Ipsos-Insight on behalf of PayPal, the online payments division of eBay, found that 72 percent of companies doing business online cited higher sales as a positive outcome of their decision to launch a website. Another 65 percent said they found e-commerce had served to boost their profits.
And the future looks even brighter. Forrester Research, an independent technology research company, projects online sales will reach $316 billion by 2010, or 12 percent of all retail sales; it predicts that by that time, 77 percent of U.S. households will have regular online access, with 40 percent buying online. Forrester estimates most shopping categories will post compound annual growth of between 10 and 20 percent during that period. Certain segments are in line for above-average growth, including tools, hardware, garden supplies and flowers, as consumers shift from ordering over the phone to using online methods.
And then, there's salt.
With a database of 10,000 customers and an anticipated $4 million in 2005 sales, 3-year-old SaltWorks Inc. of Redmond, Washington, bills itself as the world's leading company focused exclusively on sea salt—and we're talking both brick-and-mortar stores and the cyberspace variety.
For 39-year-old founder Mark Zoske, the choice to set up shop on the internet was a no-brainer, although he was worried about fronting the $50,000 to $100,000 it can take just to design a site. But his partner, Naomi Novotny, 34, says it became clear early on that focusing on an e-commerce operation was necessary. "It's our main advantage. We are really the only salt company that specializes in sea salt. There is a credibility level. We are out on the web; our competitors just aren't out there," Novotny says. "It seems like big suppliers of raw material aren't up to speed technology-wise."
SaltWorks sells everything from shakers of gourmet sea salt to 44,000-pound containers it acquires on behalf of the bigger spice companies.
"If it's a niche and it's spread out all over the world, then some portion of every town has some potential customers. There are some products you just can't sell any other way," says Matthew Roche, co-CEO and president of Offermatica, a San Francisco company that advises websites about how to convert visitors into buyers. "E-commerce is the anti-Wal-Mart," Roche quips.
Certainly, you wouldn't find the Salish Alderwood Smoked Salt that was recently featured on the SaltWorks site at your local grocery store. Both Novotny and Zoske had some previous experience in starting a business, so they split the startup tasks. Novotny negotiated tight relationships with sea-salt farmers in Belgium, France and Israel—often entering into exclusive deals to ensure supply—while Zoske boned up on technology.
Early on, SaltWorks located the server for its website at a local company, sharing the costs with other companies using the same hardware. But with more than 3,000 visitors per day, Zoske says, his site began hogging the server's capacity more quickly than he had anticipated. So SaltWorks bought its own server, although it still hires an outside firm to keep it up and running. To design the site's visual identity and transaction features, Zoske retained an on-staff development expert. The software behind the site includes Microsoft SQL Server (a recent upgrade from the company's original Access database); Microsoft's ASP.NET software for developing websites; Macromedia Dreamweaver and Macromedia Flash, which were used for creating animations and other visual content; and graphics-editing software including Adobe Photoshop.
Although he could have hired an outside designer—costing anywhere from $50 to $200 per hour every time the site needed an update—Zoske went with a staff expert because he needed to update the site often with new information, especially for its extensive salt reference guide. That guide, in fact, is used by SaltWorks in marketing activities to entice visitors to the site. Says Zoske, "We hoped that once they felt like they got something for nothing, maybe they would do some shopping."
Conversely, Auctions by the Bay Inc. is all about selling—antiques, to be precise.
The business was conceived as an offshoot of a popular antiques and collectibles fair in Alameda, California, in part to clear out goods that didn't sell. But co-founder Allen Michaan sought a bigger audience for his two monthly auctions than local crowds could create. So despite witnessing the failed online efforts of several venerable East Coast auction houses, he turned to eBay, where he and his wife, Sandra, 35, had made numerous purchases of their own. Says Allen, 52, "It was an absolutely logical move for us to put all of this on eBay, live."
"All of this" refers to the 22-person company's art deco-style theater in Alameda Point's former Navy facilities, where up to 450 bidders can view images of each item projected onto a movie screen as it is put up for bid. Simultaneously, employees manage bids submitted over the eBay Live Auctions service. Online bidders view the items via an electronic catalog that is uploaded to eBay prior to each event. For this service, Auctions by the Bay is subject to two fees: It must pay $1,500 for each catalog (up to 10,000 lots) that it uploads for an auction, and it is charged a final value fee of 5 percent of the final sales price to successful internet bidders. For 2004, Allen projects sales of about $4 million.
According to Allen, clients choose the showroom or eBay depending on the weather and the size of lots being auctioned. "If we have a large variety of small merchandise, we tend to sell more on the internet," he says.
That's because shipping fees can escalate quickly for delicate, yet sizable, antiques. Early on, Allen's team began warning online bidders to investigate the costs beforehand, after receiving some negative eBay feedback from buyers shocked by the delivery charges. The priciest item sold to an internet bidder was about $12,000, Allen recalls. "When you start getting into tens of thousands of dollars, it's less likely [for delivery to be a problem]. If there is something they want that badly, they'll show up in person," he says.
One drawback to adding the eBay component is that some bidders who show up in person are overwhelmed by rivals who aren't even in the room. Still, don't assume that gives the locals a disadvantage: Allen relates that some successful internet bidders will show up in person within 15 or 20 minutes to pick up items they've won.
Although it wasn't conceived as part of her original business plan, Gwen Richardson, 46, says customers of her 6-year-old site, Cushcity.com, seek out her local storefront when they're in Houston.
Cushcity.com, named for the biblical figure Cush, offers what Richardson claims is the internet's widest selection of African-American-centric products, from books to calendars to toys. She started the venture with her husband, Willie, 56, when she found it difficult to find books for their daughter.
The last three years have been rough, and the Richardsons' business—expected to generate $1.5 million in 2005—hasn't grown as fast as Gwen would have liked. She says most of the mistakes made in the business resulted from her lack of previous retail experience. For one thing, Gwen initially invested in too much inventory; she has since learned to stock only the most popular items. Many of Cushcity.com's 34,000 customers actually pick up the phone when they order, and the staff takes that opportunity to find out what's hot. "They like to talk, and we listen," Gwen says. "The fact that we take calls and talk to our customers has really saved us money."
Cushcity.com's biggest puzzle right now is a technical one. When the Richardsons created the site in 1998 with about 700 items, they opted to use an application called Bookware, designed for bookstores. Now Cushcity.com's inventory has ballooned to more than 20,000 products. Although the Richardsons want to add what are now considered to be standard e-commerce features, such as letting a customer log in to his or her account to make a quick purchase or check order status, they are faced with doing this through custom programming. Gwen says that's because many off-the-shelf e-commerce software packages can't support the number of products Cushcity.com carries.
Another issue for the Richardsons: The way most other software programs create product pages could entail a complete overhaul of the way their site is designed and, as a result, could hurt their search page rankings. Cushcity.com doesn't plan to move its site to different software for the time being, although Willie is evaluating its options, which include looking to outside experts who can build new functionality into the existing technology.
The Buddy SystemWhen it comes to online transactions, don't go it alone—see if PayPal can help.
With more than 50 million members, the PayPal online payment service from eBay may provide one of your biggest consumer pools. PayPal works by linking to a buyer's credit card, bank account or debit card, which means that information doesn't get exposed on the internet during a transaction. That has the advantage of helping your buyers feel more secure. With a program called PayPal Buyer Protection, eBay has taken security a step further. The program provides coverage of up to $1,000 for nondelivery of items purchased on eBay (or for items that aren't as described).
For sellers, PayPal also offers a number of benefits. It can be used in transactions that require recurring fees. Or it could prove useful if your customer demographic, such as teenagers or college students, typically doesn't have a credit card.
Exclusive research commissioned by PayPal in summer 2004 found e-commerce businesses that set up shop in cyberspace within the last three years were more likely to offer PayPal as a payment alternative. The research, conducted by Ipsos-Insight on behalf of PayPal, also compared the perceptions of PayPal merchants with those that use other methods for completing transactions. In particular, PayPal sellers were more likely than their counterparts to believe their transaction methods allowed them to receive payments quickly and easily.
Historically, PayPal has been used on eBay and by smaller merchants. Ipsos-Insight's research found that the majority of respondents that use PayPal as their transaction method generate less than $1 million in annual revenue. However, PayPal is being adopted more broadly, as evidenced by electronic payments provider CyberSource's recent decision to add PayPal as another option to the types of transactions it supports.
Gwen isn't sure she wants to risk hurting the company's profile on search engines. That's because online marketing experts believe that, hands down, that's the most important place for an e-commerce entrepreneur to build visibility.
"It's probably the best and easiest way to start," says Jason Cohen, founder and CEO of MediaWhiz, an online performance marketing company in New York City. "Most of the search engines are offering tools you can use to track the results; you can start to measure the effectiveness."
Cohen suggests you start by submitting site information via paid search services, which allow companies to "bid" on terms they want to associate with their websites. The more money you're willing to pay for a certain word, the higher the visibility your site will receive on the list of options presented after someone enters a search query. Upward of 90 percent of paid search traffic is related to Overture, a service provided by Yahoo!, and the Google search site, Cohen says. "The more targeted words are better," he advises. "And you want to be straightforward in your descriptions about what you're promoting."
Zoske takes his business's profile on the major search engines very seriously, and he manages 10,000 different keywords across 12 different sites. He used to devote much more time to this activity but now spends about an hour daily ensuring SaltWorks isn't spending more money than it should. "You can spend thousands of dollars a day if you're not careful," he says. There are services you can use to handle this activity, but they can cost upward of $1,800 per month, Zoske says.
Gwen Richardson has used e-mail newsletters to good effect. Indeed, before Cushcity.com launched in December 1998, she began sending e-mails to potential customers. Now she uses the opt-in newsletter to send information about new items and promotions. Gwen also developed a special program for book clubs and started one in Houston to host book signings by new authors.
For his part, Allen Michaan actively promotes his eBay auctions with an extensive catalog on his website and through national advertising. The company is even flirting with doing a pilot for a weekly reality-TV program for a local station, tentatively titled "Bay Area Treasure Hunt" and hosted by Sandra, an acknowledged expert in vintage clothing.
Ringing up Sales
Once customers find you, your checkout process can make or break your e-commerce site. That's one reason Zoske actually built SaltWorks' shopping cart area from scratch—to keep the design consistent.
DoubleClick Inc., a leading provider of website analytic services, reported in August that while online consumers today are more likely to select items and place them in their shopping carts, they are also more likely to abandon the sales than in the past. Roughly 57 percent of carts were abandoned during the second quarter of 2004, and consumers were less likely to re-initiate the transaction, according to the company's quarterly "E-Commerce Site Trend Report," which includes data representing more than $1 billion in e-commerce sales. The bottom line: DoubleClick believes that for every dollar spent online, about $4.51 is left in a cart.
Some experts believe abandoned carts are a natural part of the evolution of e-commerce. After all, consumers browse real-world malls, too, without necessarily buying. Still, there are ways to improve your conversion rates.
Lauren Freedman, president of the E-Tailing Group Inc., a Chicago firm that provides merchandising advice to e-commerce companies, says online merchants can decrease the likelihood that a customer will give up on a transaction simply by making sure the shopping cart feature works. Recently, merchants have run up against problems with customers who use software that blocks pop-up ads, she says. Moreover, she says to concentrate on making sure the purchase process doesn't take too long and that your customers know exactly what stage they are at in the transaction. The average number of clicks needed to complete a typical purchase is around six, she says, and making the process easy can definitely be a point of differentiation.
Like it or not, entrepreneurs and experts report that one big impediment to e-commerce is still security, especially when tied to accepting online payments.
According to Ipsos-Insight's research, the higher the proportion of sales that came from a company's online activities, the more likely they were to have challenges associated with fraud prevention.
"Many people are still concerned about credit-card risk, security, credit-card fraud, or violations of personal information that people enter into a website," adds Grau of eMarketer. And every reported security incident exacerbates the perception problem, he notes.
Sami Laine, director of solutions architecture for CyberSource Corp., a provider of electronic payment and risk management services in Mountain View, California, says one of the online merchant's top fears—that customer data will be pilfered and purloined by an outside intruder—can be addressed through simple policies, such as storing profile information on a separate site.
Another challenge is verifying credit-card information submitted electronically via an Address Verification Service, without actually turning away real customers. "Merchants sometimes think this is safer than it is, but this is not a good predictor for fraud," Laine says. "Plus, up to 95 percent of the 'no matches' are actually real cardholders."
Auctions by the Bay found out firsthand how vulnerable you can be shortly after its first online auction, when it noticed that the Apple Power Mac G4 that hosts its site was running very slowly. Baffled, Allen called an outside technical expert and discovered someone had hacked into the site and was using it to store video files. An employee had given the intruder his opening after uploading new images to the site and failing to close down a connection.
Experts agree that amid juggling all the tactical issues an e-commerce entrepreneur faces daily—like keeping site content updated and optimizing search engines—there is one key strategy they should embrace: creating a more personalized experience for each customer.
"As marketing gets more expensive, you actually have to tune the message," says Offermatica's Roche, pointing to the rise of cross-selling practices such as offering complementary products when a customer is checking out on your site. "The aim is just to put the whole offer in front of someone."
And remember, the internet is especially kind to niches, so don't try to be all things to all customers. Says Richardson, "If you can get it at Wal-Mart, we don't sell it."
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